Our country and most of the rest of the world are in an economic recession, and we are all suffering the fallout from the most significant and severe economic crisis since the Great Depression. Major corporations are filing bankruptcy and are going out of business, banks are being taken over by the government and record numbers of homeowners are losing their homes through foreclosure. It is no surprise that we are also seeing a steep rise in the number of delinquent homeowner’s assessment accounts and the loss of assessment income among California community associations.
While it is a fact of life that many community associations will not collect the unpaid assessments from those homeowners that cannot afford to keep their homes, or recover assessments from homeowners that have already lost their homes to foreclosure, there are some things that associations can and should do to maximize their chances of collecting and/or addressing the loss of that income.
First, act quickly. Review your collection policy and perhaps consider revising it if it allows too much time after a homeowner becomes delinquent before collection action can be taken. Start the collection process after the homeowner is delinquent one month (which is forty-five (45) days from the date the assessment was levied). That means sending out a courtesy letter reminding the homeowner that they are delinquent and encouraging the homeowner to contact the association if they are going to have trouble paying their assessments. Give the owner no more than fourteen (14) days to respond, and if they do not respond, start the collection process.
Second, offer a payment plan. Do what you can to assist the homeowner that is serious about home ownership in your community association but is experiencing temporary financial hardship. This does not mean giving them a permanent discount on the assessments owed, as that is just not something the association can or should do. On the other hand, if the homeowner says they can pay what they owe but needs some time, work with them.
Third, record a lien. Secure the association’s interest by recording an assessment lien, even if the association approves a payment plan. The recordation of a lien puts the association in the position of a secured creditor in the event there is a bankruptcy and in line to receive surplus funds, if any are available in the event of a bank foreclosure.
A lien will also put a foreclosing bank or lender on notice that the real property is located in a community association. Often, a bank or lender will foreclose and have no idea that the property is located in a community association and that it owes assessments from the date of the foreclosure sale. Associations and/or their managing agents must be proactive in identifying the bank or lender and enforcing the assessment obligation against them as it would for any owner. The banks and lenders do pay assessments either upon their own volition or with a bit of prodding by the association and/or its managing agent. It is not uncommon to receive a request for an escrow demand months into the delinquent assessment collection process and for the association to receive delinquent assessments, late fees, interest and collection costs from the date of the bank’s or lender’s foreclosure sale. In fact, we are seeing some foreclosing lenders paying the assessments that were owed prior to their foreclosure, so do not hesitate to make the demand.
In some instances, associations may have to consider compromising the amount due by negotiating settlement where appropriate, in order to collect some, even if less than all, money from delinquent homeowners. This evaluation will require that the board consider the owner’s equity (if any) and other financial matters.
Fourth, be prepared to foreclose. Unfortunately, a lot of banks and mortgage lenders made a lot of money giving loans to people who were not required to put any money down and could not afford those mortgages, much less homeowners association assessments, when they were made. As a result, many associations are going to face financial problems from the loss of this budgeted income. Association Boards of Directors need to be prepared for this situation, as it may very likely happen to your association. If a homeowner has negative equity and cannot afford to pay the assessments, they will likely allow the unit or home to be lost to foreclosure. If that occurs, the association will have to move quickly in an effort to get someone into the unit that can pay. This means that the association may have to invoke the power-of-sale contained in most CC&Rs and initiate foreclosure of its recorded liens. You cannot afford to sit back and wait, as that is not going to get the association the money it needs to pay its bills. Accept the loss and move on.
A homeowners association foreclosure sale is not as onerous as it sounds. Unlike a bank or lender foreclosure, the homeowner may redeem the property for up to 90 days following the homeowners association foreclosure sale. And, although a homeowners association foreclosure sale may result in the association’s acquiring title to the property, the association is not responsible for payments on the senior obligations. If the association does not intend to retain title to the property, it does not become obligated for the mortgage or loan payments, nor is it responsible for property taxes, or any other obligations associated with the property. After the Association’s foreclosure sale, the association can take no action and allow the bank to foreclose; the association’s credit is not impaired, since the mortgage is in the homeowner’s name.
The bottom line is that associations cannot and should not expect to collect all assessments that are owed and delinquent. Be prepared to take action as recommended in this article. And when in doubt, consult with an attorney who is experienced in assessment collection matters.